Which kind of retirement account is best?
From a tax perspective, it’s a matter of minimizing the amount you pay.
Will you pay taxes on the money you pull from your retirement account? If so, you’re likely holding a pre-tax 401(k), 403(b), or IRA (also called a tax-deferred account or traditional account). These provide a tax deduction when funds are contributed but are taxed when you withdraw those funds.
Another account option—tax-free accounts, such as Roth 401(k)s, Roth 403(b)s, and Roth IRAs—alleviates taxes in the future. These are opposite to traditional accounts—you are taxed when the money goes in but not when it comes out.
Which is best?
Here are three quick things to consider:
1. Your Tax Bracket: The Roth/traditional decision depends highly on which tax bracket you think you’ll be in when funds are distributed. If you believe you’re currently in a low tax bracket, then it would make sense to contribute to a Roth IRA, paying taxes now. On the other hand, if you’re in your peak income years toward the tail-end of your career, then it might be beneficial to take the tax deduction and contribute pre-tax to traditional retirement accounts, to be taxed later.
2. Multigenerational tax planning: If your retirement funds are more than likely going to be inherited by someone else, then a Roth account may make financial sense and could put the person receiving the inheritance in a better tax position.
3. Charitable Donations: If you are leaving money to a charity, then traditional would make more sense because the charity generally will not pay income tax on the funds taken out of the account.
Ultimately, our team will provide the financial answer to the Roth vs. traditional question and will work with you to find out what makes sense for you and your family.
For a complimentary consultation with one of our Wealth Managers to discuss how your retirement plan impacts you, reach out at [email protected]
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.